Recent Executive Order Extends Civil Penalties Against U.S. Parent Companies for Foreign Subsidiary Violations of Iranian Trade Sanctions

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Earlier this month, President Obama signed Executive Order 13628 (EO 13628), which increases the risk of civil penalties against U.S. parent companies based on transactions undertaken by their foreign subsidiaries.

Section 4 of EO 13628 creates the most significant impact on U.S. companies and their foreign subsidiaries.  Section 4(a) prohibits any “entity owned or controlled by a United States person and established or maintained outside the United States may knowingly engage in any transaction, directly or indirectly, with the Government of Iran or any person subject to the jurisdiction of the Government of Iran,” if the transaction is prohibited by U.S. laws or regulations.

Significantly, Section 4(b) permits civil penalties to be imposed against U.S. companies that own or control the foreign entity that engages in the prohibited transaction, while Section 4(c) creates a window of opportunity for U.S. parent companies to divest and avoid civil penalties if the parent “divests or terminates its business with the [foreign] entity not later than February 6, 2013.”

Notably, the Executive Order’s penalty provision does not apply to U.S. companies that have an existing OFAC license to export medicine or medical devices to Iran under the Trade Sanctions Reform Act, a so-called “TSRA license.”  However, companies should review all TSRA licenses to confirm activities by their foreign subsidiaries are covered and ensure there is no compliance risk in light of EO 13628.

This new development marks the first time that U.S. sanctions against Iran have been extended to cover the activities of U.S. owned or controlled foreign subsidiaries.  Only U.S. sanctions against Cuba have similar extraterritorial reach to U.S.-owned or controlled foreign subsidiaries.

Ahead of the President signing EO 13628, OFAC posted three new FAQs on its website, entitled Questions Related to Section 4 of Executive Order “Authorizing the Implementation of Certain Sanctions Set Forth in the Iran Threat Reduction and Syria Human Rights Act of 2012 and Additional Sanctions with Respect to Iran,

Regardless of the November 6 Election Day outcome, it seems unlikely that a change in administration will cause a change in U.S. policy regarding sanctions against Iran.  Therefore, U.S. companies and foreign businesses owned or controlled by U.S. persons (individuals and entities) should be reviewing how EO 13628 may impact their business activities, be planning for a change in those practices, and reviewing export controls and economic sanctions compliance policies and procedures to account for this latest development.

For questions and assistance regarding EO 13628 and other export controls and economic sanctions issues, please contact Jon P. Yormick, Attorney and Counsellor at Law, [email protected].

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